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International revenue: Many of Silicon Valley’s biggest public companies reported in their most recent annual reports that they received half or more of their annual revenue from business outside the United States.

American companies have long been able to avoid paying some taxes on income earned outside the United States, which has helped them earn higher profits on software, solar panels and other products sold overseas.

But the recent proposal, made by President Barack Obama on Feb. 1, could end this provision. The measure was part of Obama’s $3.8 trillion federal spending package for the coming fiscal year and is intended to help raise money for government programs.

Several valley executives say the proposal would result in American companies — especially Bay Area technology firms with extensive overseas operations — falling behind their foreign rivals in profits earned as well as research and development.

One vocal critic is Mike Klayko, CEO of San Jose-based Brocade Communications Systems Inc. He said the measure may force companies to “close up shop here” and move abroad.

Brocade earned $680 million overseas for the fiscal year ending Oct. 31, 2009, or 35 percent of its total revenue, according to company spokesman John Noh.

“This (proposal) seems to fly directly in the face of the president’s call to arms during his State of the Union address for U.S. companies to double their exports in the next five years,” Klayko said.

Jim Parker, tax director for SunPower Corp. of San Jose, agrees the proposal could hurt business.

Parker is one of several executives who noted that other countries, such as the United Kingdom, France, Japan and Germany, do not tax their companies’ foreign income. He said Obama’s proposal would increase companies’ operating costs by so much that they might have to fire U.S.-based workers to save money.

“It’s one potential outcome,” he said.

Focus on more federal revenue

The Obama administration’s efforts to change the tax provision date to shortly after the president took office in 2009. The government’s fiscal year 2011 budget proposal describes the American corporate tax code as being “riddled with inefficiencies and loopholes, including the fact that it allows companies to indefinitely defer the payment of U.S. taxes on foreign income.”

The report further states, “The budget will reform and end these practices.”

The specifics of Obama’s plan were unclear at this time. However, valley executives say, global operations for technology and manufacturing firms are commonplace now, and American laws that hurt those companies are bad for the national economy as a whole.

Under the federal tax code, experts say, income earned abroad is taxed by the foreign country where it is earned, and if the money is brought back to the United States, it’s also taxed here.

That money is not taxed at the full U.S. rate; instead, it is the U.S. rate minus the foreign country’s rate.

In general, if money earned abroad is kept overseas, it’s not taxed by the U.S. government. Companies that earn money abroad can keep it there — and avoid paying some taxes on it — indefinitely, experts say.

Shellye Archambeau, CEO of Palo Alto software company MetricStream, said her company earns 30 percent of its revenue overseas but does not delay paying taxes on that income. Archambeau acknowledged the proposal would not affect her company, but she said the firm is connected to companies that would be.

“I can’t think of a way that this actually benefits U.S. companies as a whole,” she said.

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